Study: Best Small Cities to Start a Business

Nationwide, just half of small businesses survive more than five years. Given that statistic, it makes sense for entrepreneurs to do some careful research before setting up shop in a particular location. After all, cities have vastly different business climates, and some are more supportive than others.

But if you’re eager to start a business in a small metro area rather than a competitive big city, it may be tough to suss out the best place nationwide - there may be places you’ve never heard of that might make the perfect locale for your new business.

Never fear: CreditDonkey is here to help. To figure out which small cities nationwide are the best for starting a small business, CreditDonkey analyzed five key metrics. The cities listed here have a winning combination of a vibrant community, lower cost of living and highly educated residents.

Study Methodology

Percentage of total small businesses that have failed in a particular area

Small business birth/small business death differential

Percentage of population employed by small businesses

Percentage of residents with a bachelor’s degree or higher

State’s percentage of annual venture capital investment

Based on data pulled from the U.S. Census Bureau, the first two statistics indicate whether a city is friendly to businesses or not, depending on how many businesses fail each year versus how many are created (or born, to put it another way). This information was based on a comparison between 2009 and 2010, the most recent year available.

Then, we looked at a metric that measures the pool of potential employees a small business can access – the overall population size – and how many of them are employed by smaller companies. For this study, we presumed that if a relatively small percentage of employees work for small businesses, then most businesses operating in the area are likely large corporations, which may not bode well for a new business’ ability to thrive.

The percentage of residents with a bachelor’s degree or higher indicates the quality of the labor pool and the availability of skilled employees. Finally, we also factored in state-level data. Cities in states that receive larger percentages of venture capital investment present small business owners with a greater opportunity to grow.

Top 10 Small Cities for Starting a Business

10. Ann Arbor, MI

Small business failures: 11.8%

Birth/death differential: -72

Small business employment: 6.8%

Bachelor’s degree or higher: 49.7%

State percentage of venture capital: 0.6%

Another college town to round out the top 10, Ann Arbor houses the main campus of the University of Michigan and its 43,000 students. This city has the worst small business birth/death differential in the top 10 but makes up for it by the fact that nearly half of the residents hold at least a bachelor’s degree. This education percentage is among the highest of any small city in the U.S.

Did you know: Ann Arbor has its own economic development program named SPARK that supports high tech and innovative businesses in the area. SPARK offers entrepreneurs resources to help them start and run successful businesses, and it hosts a variety of events each month that range from networking meetups to educational seminars.

9. Lubbock, TX

Small business failures: 11.5%

Birth/death differential: +12

Small business employment: 7.3%

Bachelor’s degree or higher: 27.3%

State percentage of venture capital: 4.01%

Lubbock is home to Texas Tech University, which offers both law and medical degrees in addition to traditional undergraduate majors. Lubbock hovers around the small city average in four of the five metrics considered, but gets a major boost by Texas’ ranking as the fourth best state for earning venture capital investment.

Did you know: Lubbock is one of 36 cities in the U.S. and Canada to host Lemonade Day, a program that encourages kids to become entrepreneurs. Participants learn all the key steps in starting a business, including planning, budgeting, providing good customer service, and finding an investor.

8. Nashua, NH

Small business failures: 11.0%

Birth/death differential: -29

Small business employment: 7.7%

Bachelor’s degree or higher: 37.3%

State percentage of venture capital: 0.27%

Nashua makes the top 10 largely because 37.3% of its population has attained a bachelor’s degree or higher – a percentage that easily puts it in the top 25% of small cities in the U.S. It also scored well for having one of the lowest percentages of small business failures for a small city. In addition, Nashua is above average in the percentage of people employed by small businesses.

Did you know: In honor of the U.S. Small Business Administration’s “Small Business Week” every May, the local SBA chapter hosts an awards luncheon in Nashua to recognize a Small Business Person of the Year and other honorees.

7. Shreveport, LA

Small business failures: 10.4%

Birth/death differential: +40

Small business employment: 6.7%

Bachelor’s degree or higher: 23.4%

State percentage of venture capital: 0.05%

Over 75% of Shreveport residents have not earned a bachelor’s degree, but the city ranks seventh because it holds the second best small business birth/death differential and second lowest percentage of small business failures. Entrepreneurs interested in raising venture capital might want to look elsewhere, though – Louisiana is solidly in the bottom quartile of the 50 states in venture capital investment.

Did you know: Many communities have programs in place to help small businesses, but Shreveport is one of the few to offer a program specifically geared toward artists interested in becoming entrepreneurs. The Shreveport Regional Arts Council offers an Entrepreneurial Training Program to artists who want to develop a professional career.

6. Anchorage, AK

Small business failures: 12%

Birth/death differential: +19

Small business employment: 8.2%

Bachelor’s degree or higher: 30.9%

State percentage of venture capital: 0%

Anchorage makes the list despite $0 in venture capital investment over the past two years. Instead, the city earned its ranking with a highly educated population – 30.9% of residents have at least a bachelor’s degree – and the second highest percentage of residents employed by small businesses of all cities in the top 10.

Did you know: Even though Alaska is not a hotbed for venture capital funding, the state set up a $13.2 million angel fund last year that it will use to invest in promising local businesses. Two businesses have already received funding in the combined amount of $2.1 million.

5. McAllen/Mission, TX

Small business failures: 12.2%

Birth/death differential: +145

Small business employment: 4.4%

Bachelor’s degree or higher: 16.3%

State percentage of venture capital: 4.01%

One of two states with two cities in the top 10, Texas makes its first appearance with Mission and McAllen. This area ranks high because it has the best small business birth/death differential of all the small cities we evaluated. Small businesses were more likely to succeed than cease operations between 2009 and 2010, a period that saw the net creation of 145 companies. Impressively, Texas as a state has also secured the fourth highest amount of venture capital investment over the past two years, behind venture capital heavyweights California, Massachusetts, and New York. The area’s only major downside? Just 16.3% of residents have attained a bachelor’s degree, well below the average for small cities.

Did you know: The McAllen Chamber of Commerce awards grants to local entrepreneurs in increments of $10,000. The annual contest, which provides up to $50,000 in total awards, requires potential recipients to provide a project summary, a presentation, and the ability to convey their business’s viability and innovation.

4. Durham, NC

Small business failures: 12.0%

Birth/death differential: -2

Small business employment: 6.6%

Bachelor’s degree or higher: 44.7%

State percentage of venture capital: 0.69%

Almost 45% of Durham’s residents have at least a bachelor’s degree, and the city is home to Duke University, one of the best universities in the country. The birth/death differential for small businesses is essentially even, which is much better than the small city average of -113.

Did you know: Durham is one of the three corners of the “Research Triangle” that got its name from Research Triangle Park in the 1950s. The area is known for the presence of high tech companies and the presence of three major universities at each of its three corners: Duke University in Durham, the University of North Carolina at Chapel Hill, and North Carolina State University in Raleigh.

3. Lincoln, NE

Small business failures: 10.1%

Birth/death differential: -3

Small business employment: 7.9%

Bachelor’s degree or higher: 35.9%

State percentage of venture capital: 0.04%

Only 10.1% of small businesses that existed in Lincoln in 2009 went out of business in 2010 – the lowest percentage of all cities in the top 10. Lincoln also has a small business birth/death differential that’s essentially even, which means the business environment is amenable to both starting and running a small business. Home to the University of Nebraska – Lincoln and its 24,000 students, 35.9% of this city's residents hold bachelor’s degree.

Did you know: Nebraska ranks in the bottom 20% of U.S. states for securing venture capital investment, but a nonprofit group called Invest Nebraska is hoping to change that. Made up of investment managers and analysts, this organization works directly with entrepreneurs to help provide access to funding through venture competitions and several types of funds. Only businesses currently located in or willing to relocate to Nebraska are eligible.

2. Lafayette, LA

Small business failures: 11%

Birth/death differential: +20

Small business employment: 10.1%

Bachelor’s degree or higher: 24.3%

State percentage of venture capital: 0.05%

Over 10% of Lafayette’s residents are employed by small businesses, which is well above the U.S. small-city average of just 6.7%. The city also has a positive small business birth/death differential – a rarity among small cities – and sees just 11% of its small business population fail each year.

Did you know: Lafayette has its own local entrepreneurship organization – the Acadiana Entrepreneur Group. A collection of business owners and entrepreneurs in the Lafayette area, AEG is a supportive community built on members sharing experiences to help each other start and run successful businesses.

1. Boulder, CO

Small business failures: 14.1%

Birth/death differential: +21

Small business employment: 10.5%

Bachelor’s degree or higher: 57.9%

State percentage of venture capital: 1.92%

Of the 124 small cities considered for these rankings, Boulder boasts the highest percentage of residents who have attained at least a bachelor’s degree, at 57.9%. The University of Colorado Boulder, with its 30,000 enrolled undergraduate students and 7,000 enrolled graduate students, can certainly be credited to a large extent for the city’s well-educated population. For those interested in securing venture capital, Colorado is among the top 10 states in the country for securing venture capital investment over the past two years.

Did you know: Entrepreneurs interested in starting businesses in a science-based industry can find like-minded individuals in Boulder. The city is home to more than a dozen science institutes, including the Geological Society of America, the Cooperative Institute for Research in Environmental Sciences, and the National Institute of Standards and Technology.

Location alone can’t guarantee the success of a new business. Many other factors play a role in determining whether a startup -- which we defined as new businesses with fewer than 20 employees -- will thrive or not. Still, starting a business in a region with a favorable environment, quality labor pool, and potential for venture capital investment gives you the best chance to avoid failure. Fortunately, potential entrepreneurs don’t need to invest solely in major metropolitan areas to find these attributes – there are some great small cities that offer them in abundance as well.

Leah Norris is a research analyst at CreditDonkey, a credit card comparison and financial education website. Write to Leah Norris at leah@creditdonkey.com. Our data-driven analysis has been recognized by major news outlets across the country and has helped women make savvy financial and lifestyle decisions. (read more)

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